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I have a long history with Bio-Rad (NYSE:BIO) (NYSE:BIO.B), having covered this life sciences company long ago in my sell-side days. It has always been an odd duck in the life sciences world and remains so, with the company better thought of as a “picks and shovels” company with broad exposure to biomedical research and clinical diagnostics, but not really a high-value area of expertise that allows it to stand out on growth, margins, or returns.
To that end, revenue has grown around 5% annualized over the last two decades and while Bio-Rad shares have outperformed the S&P 500, they’ve been left behind by more dynamic players like Agilent (A), bioMerieux, Bio-Techne (TECH), Danaher (DHR), and Thermo Fisher (TMO).
At this point, Bio-Rad is a strange stock to evaluate. I’m not that excited about “core Bio-Rad”, even with the company’s ongoing decade-long restructuring and transformation process, but I can’t ignore the value that the company’s holdings in Sartorius (OTCPK:SARTF) (a leading German life sciences and bioproduction company) brings to the table. With that holding, I think there’s an argument that Bio-Rad shares are worth a look on a sum-of-the-parts basis.
This Year (2024) Isn’t Looking Like A Banner Year
Recent trends in the life sciences space haven’t been great, as biopharma companies have pulled back significantly after spending ahead of their prior capex budgets during the pandemic to meet the surge in demand, and as academic and government labs deal with softer budgets.
To that end, Bio-Rad saw double-digit declines in its Life Sciences segment in the last two quarters (down 17% yoy in Q4 and almost 14% in Q3), with fairly broad weakness across categories. While Bio-Rad was facing a challenging comp from a strong end-of-2022 budget flush, demand from China for life science tools and products practically collapsed in the second half of 2023 for the industry, and Bio-Rad likewise saw meaningful weakness here. At the same time, demand from biopharma has been weak as companies have held off on new instrument purchases and worked down consumables inventories.
I’m not seeing a lot of joy on the near-term horizon here, either. The NIH budget allocation for 2024 was not great (sub-1% growth) and Horizon Europe is looking at a 2% cut. While China recently passed a stimulus effort targeting the science and technology sectors, I don’t expect a quick bounce here. The best-case scenario may be Bio-Rad’s “picks and shovels” business finding stability before some of its peers, as customers will still need consumables for core functions like PCR, chromatography, and cytometry.
Clinical Diagnostics was stronger for Bio-Rad in the second half of 2023, and I expect that to continue into 2024. Businesses like diabetes (HbA1c testing and the like), blood typing, autoimmune testing, and QC aren’t growth markets, but they’re usually pretty steady when patient counts at hospitals are back to normal (as they are now).
Growth Opportunities, But Likely To Blend Into The Background
The good and bad of Bio-Rad is that there’s nothing really special about the story in terms of growth drivers.
The company does have leverage to growth opportunities in areas like liquid biopsy, cell/gene therapy, and proteomics through its digital PCR offerings (Droplet Digital PCR in particular), but there are plenty of players in digital PCR, including Thermo Fisher, and I don’t see the “can’t miss” aspect to Bio-Rad’s offering that will make it a clear winner in the market. Likewise in areas like cell biology and bioproduction – Bio-Rad has offerings that make them a participant in these attractive (over the long term, at least) markets, but nothing that, to me, looks like it will drive clear leadership. Again, as much as it’s a cliché, I think that “picks and shovels” description fits here. Bio-Rad has the instruments and consumables to participate in the future growth of a wide range of biomedical research areas of interest, but nothing that will really elevate them as a “go to” name. I don’t think it’s coincidence, then, that Bio-Rad’s historical revenue growth rate is pretty close to the historical growth rate I often here quoted for the life sciences space in general (around 5%).
So too in the Clinical Diagnostics business. I like the company’s efforts to expand its PCR-based offerings for molecular diagnostics (a large market where Bio-Rad hasn’t historically had a big presence), including the 2022 deal for Curiosity diagnostics, but I don’t think companies like Roche (OTCQX:RHHBY), Becton, Dickinson (BDX), or Danaher are losing sleep about Bio-Rad seeking a bigger presence in MDx.
Sartorius Is The Elephant In The Room
You can’t really talk about Bio-Rad, at least an as investment candidate, without giving some attention to Sartorius. Over a period of more than 20 years, Bio-Rad has accumulated a sizable position in the company, owning 38% of the ordinary shares and 28% of the preferred shares.
Sartorius is a major German life sciences company with a sizable presence in areas like research tools (including sample prep, cell analysis and cytometry, calibration/QC, and process filtration) as well as bioproduction.
Seemingly bottomless demand for bioproduction capacity (to make antibody therapies, cell therapies, gene therapies and the like), drove the shares up more than 4x from early 2020 to the fall of 2021, but like others in the space (Danaher, Thermo, et al.) there has been a painful hangover as biopharma companies have pulled back on their spending and investor enthusiasm has deflated.
With the value of Bio-Rad’s Sartorius holdings currently around $6.8B (or around $235/share), the future performance of Sartorius clearly will have a huge impact on Bio-Rad. I’m still bullish on balance for the bioprocessing/bioproduction space, as biopharma pipelines remain full of antibody drug candidates and as other areas like cell therapies, gene therapies, and RNA therapies are still in their early stages, but the market is in a digestion phase following that initial surge in demand (in part to address opportunities for generic antibody treatments, as well as pandemic-related products) and there will likely be a more measured pace of growth from here.
The Outlook
On its own merits, I expect around 3% to 4% long-term growth from Bio-Rad. The potential to grow at a faster rate is there, but it seems as though this company always ends up a little short of its peers/rivals, and I think 5% long-term growth is probably too ambitious. For the 20-plus years I’ve followed this company, it has always been conservative and risk-averse, and it’s tough to match, let alone outperform, your market when your rivals are willing to take more risks.
With a huge distribution network and comparatively high SG&A and R&D spending, Bio-Rad has never really stood out on margins – over two decades the company has averaged a free cash flow margin around 9%. There have been “windfall” periods over the years, when products like mad cow testing saw a surge in demand, but that’s a long track record.
More recently, the company has been taking steps to try to boost its long-term operating margin potential, part of a three-phase decade-long transformation plan, but SG&A spending was still over 30% of sales in 2023, and it’s a big ask to get closer to peers in the low-20%’s. I’d also note that with the company’s huge array of product offerings, it will be difficult to ever get to parity, as those product lines require R&D and SG&A to remain viable. With that, I think it may be difficult to surpass 20% EBITDA margins (excluding Sartorius dividends) for the next few years.
Even if I give credit to management and assume they’ll hit (and sustain) their improvement targets, it’s hard for me to see free cash flow margins growing much beyond the low-teens (11%-12%) on a sustained basis. That’s enough to support “high-mid” single-digit FCF growth, but that alone does not drive an attractive valuation.
I value Bio-Rad by discounting those cash flows back and through a margin/return-driven EV/EBITDA approach that I use for other life sciences companies, and then adding in the present value of the Sartorius holdings. That gets me to a $405-$440 value range.
The Bottom Line
Comparing today’s price to my value estimates leads me to think that the Street either really doesn’t like the Bio-Rad business, valuing it even less than I do, or is very much skeptical around the long-term value of the Sartorius holdings (or some combination). Clearly Bio-Rad couldn’t cash out and get all of that value today (I’m assuming taxes would apply), but even factoring in taxes, I get a fair value in the $350’s-$380’s.
Something isn’t quite adding up, and that intrigues me. It doesn’t intrigue me enough to have this high on watch list, after decades of watching Bio-Rad I just don’t agree with management’s core approach to the business, and I’d rather own other businesses I like better, but even I’ll concede there’s an attractive enough price for almost any business.
